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Now that you’re considering retirement, it’s time to address how your investment needs may differ and need adjusting from your working years.

That includes:

  • Considering the investment vehicle(s) right for your needs going forward
  • Managing your retirement account more closely
  • Diversifying by investments and product (perhaps products with more market downside protection and those which can be used to for retirement income)
  • Tax planning strategies
  • Whether to open an IRA/Roth account
  • Considering a rollover or consolidation of your accounts (if you have many)
  • How to maximize contribution limits to boost your retirement position.

You should know what investments you have and now is a good time to take an inventory.

What do you have?

Will it be enough?

If saving for retirement were a trip, how much farther do you need to go until you arrive at your destination (your retirement savings target)?

Sounds like a lot.  So, let’s break these up into bite-sized chunks.

Why do I need to prepare my investments for retirement?

Because your needs are different when you have a paycheck during your working years than when you may not during your retirement years.  You may be more sensitive to the ups and downs of the market because you cannot afford to have your retirement “crash”.  Your investment strategy needs to be more diversified (short, medium, and long term) than just long term, which might be how your portfolio is positioned today.

Understanding your needs and goals.

Think of when you were ages 20 and 40.  Your needs were different than today.  If you’re between ages 55-70, you’re approaching retirement and need to know what’s important to you financially so you can set up your financial positions to align with your needs.  That’s likely going to be different than how your financial picture has so far been set up.

Do you know what questions to ask?  What pitfalls to avoid?  Do you know your options?  You can either do a lot of research on your own or talk with a seasoned financial advisor (someone who understands the planning, investing, and insuring aspects of your financial life).

Assessing Risk Tolerance

Soon, you’ll need to use retirement savings for income so you’ll watch your money more carefully.  That means you’ll have less risk tolerance for your investments.

We can divide your financial needs by purpose-related risk.

  • Money to be used as income within 2 years (short term) should have no market risk.
  • Money you’ll need as income in 3-7 years (medium term), you may exchange some risk for some reward.
  • And for money you will not need for 8+ years (long term), you may be comfortable taking a similar amount of risk as you did during your working years because you won’t need to use that money as income for a while.

That’s three different buckets of money, each with a different investment strategy to align with a different risk tolerance.  You will likely have to rebalance your investment portfolio to align with your needs similar to this example.  (Note:  the number of years used per bucket may vary slightly by financial advisor.)

There are risk-hedging strategies available to you.  You just need to know if you need them, how to get them and how to apply them to your money.  A financial advisor can help with that or you can perform research on your own, if you know where to look.

Exposure to costly risks may endanger your assets.  That’s why part of your investment strategy involves ways to prevent the depletion of your investments from potentially unnecessary tax and risk.  We address both below.

Tax Planning Strategies

There are strategies you can use to help minimize your income tax exposure.  Because there’s so much change currently being discussed on the federal, state, and estate tax scenes these days, it’s important to have a strategy so you don’t pay more than you might need to pay.

Taxes may be your largest expense in retirement so tax liability management and how much of your money is tax-deferred (pay later) vs. after-tax (pay now) is a question you should consider.

  • The Tax Conversion Corridor – To help reduce your income tax burden in retirement, one popular strategy has people paying tax on their pretax retirement savings while they are still working–because it’s less of a risk and more feasible when you have the support of a paycheck.  When they retire, they can use that after-tax money as income without having to report it as income on their tax return–because they already did that when they paid income tax on it.  That can reduce your reported retirement income to help keep you in a lower income tax bracket during retirement, reducing your risk of landing up paying higher rates.

Tax Corridor Example

An example of using this “tax corridor” as a strategy would be to take money from a pretax investment vehicle, such as an IRA, a 401k, 403b, or 457 plan and pay tax on money–perhaps above your earnings that year and up to the amount which would put you in the next highest tax bracket.  That, now, after-tax money would then be moved into your Roth IRA, an after-tax account.  Money in a Roth grows tax-free and may be taken for use as income tax-free.  Many people use this strategy from age 60 onward until they have converted their retirement savings from pretax to after-tax.

Uncle Sam has a tax planning strategy for you.  The question is, do you.  A tax planning strategy can help you both minimize how much taxes you pay and not have to worry how much you might have to pay based on events outside of your control.

Managing Your Risks

You may no longer have a mortgage or dependent children but you still have interests and risks and a need to manage the risk to those interests.

  • Long Term Care – It’s costly, if you need it.  More Americans are living longer so more Americans are likely to need care in older age.  Baby Boomers are going to need care at the same time so that large wave of demand is likely to drive care costs higher.  The cost of long term/elderly care is an expense risk that can deplete your retirement resources.

Do you have a strategy to address that risk?  If you’ve ever cared for a parent or relative later in life, you already know care requires someone’s time or money to pay for care or both.  Will your parents need you to provide care to them?  Who will provide care to you?  Providing care may cost you compensation, promotion, and time.  Big questions that need a strategy.

  • Survivor Income – This often is a women-at-financial-risk question because women generally outlive men.  Helping to ensure a surviving spouse has enough income and resources to provide long term care, if needed, are part of a financial strategy.

If you’re married, both spouses should participate in financial planning because both spouses are affected by that planning.

Retirement Preparation Means Making Financial Changes

Having confidence in the financial side of your retirement is the biggest part (other than your health) of being able to pursue retirement on your terms.  You don’t have to be an asset manager, a tax guru, and a risk management consultant to ask questions and get the answers you need.  It just takes effort and the knowledge that now is the time to do that.

As you clarify what you need, perhaps with the help of your own research or with a financial advisor, you’ll likely be exposed to strategies and products you can use to help align your financial position with your needs in retirement:  your needs, not an employer’s needs.  Retirement is your own trip so find the financial vehicles which fit you best.